Self-storage economics

[nspo]

Guys, looking for some insight here. My family and I own a 38k+ sq ft warehouse in the Northeast. That said, the environment has given us the opportunity to buy out our current tenant. This tenant operates a self-storage facility that's been rather successful for the last 20+ years. There are ~400 units, 70/30 split between 10x10's and 5x5's, pricing is from $65-$200 a unit/month, and current occupancy rests at 76%. These figures lead to roughly $120k in NI. While still in preliminary discussions, he's looking for about $250k for the business.

 

My questions are: What's the PMV of such a deal (excluding land value, strictly the business)? How are storage facilities usually priced (based on NOI, FFO, FCF etc.)? And do the economics of this deal look appealing? Please add any experiences/advice. Thanks!

[bizaro86]

If I was buying a self storage in a leased facility, I would value it by NPV of the business NOI over the remaining term of the lease. I would use a high discount rate (20%?) because effectively you're buying a small business, and they trade at low multiples.

 

I wouldn't pay much if anything for value beyond the end of the current lease, because the landlord has huge leverage with a self-storage tenant at the end of a lease. It would be very difficult to move the operation elsewhere, as all the individual sub-tenants would need to move their stuff into new lockers. So the operator would need to pay for new lockers at the new location, then compensate everyone for moving, and then deal with the old lockers somehow. Probably it ends up being cheaper to pay significantly increased rent.

 

Of course, if you/your family owns the property you presumably wouldn't have this risk, so buying out the tenant may make sense. You would be giving up the opportunity to raise the rent at the end of the term, however, whenever that happens to be.

 

The other way you could calculate the value of the tenants operation would be calculate the value of the self-storage operation as a whole, and then calculate the value of the building with the current lease, and take the difference. Then make an offer that allows you to profit by buying out the business.

[LC]

I would also want occupancy and pricing curves for a period of the business' history, and also independently do some analysis of the surrounding area as that will be your tenant mix.

[shhughes1116]

My preference is to value these businesses on the basis of free cash flow. 

 

The suggestions made by LC are good, and will help you understand how free cash flow might change over time. 

 

Not sure about your relationship to this tenant, but given you own the building, and assuming you own the improvements made to the building, you are in the driver's seat for negotiating a pretty low FCF multiple.   

 

The main question I would ask myself is whether the extra FCF from buying the business (above and beyond the rent) is worth the headache of running the underlying business on a day-to-day basis. 

[TrashIsCash]

It looks like a homerun to me...  If I understand you correctly, you’re buying $120,000 of NOI for $250,000.

 

Self storage facilities are valued on Cap Rates and Price per Sq.Ft.  If the facility is in a location that is at least decent, then it would trade for under a 10% cap rate.  So, that additional $120,000 of income adds $1.2MM of value to the property. 

[jckund]

It looks like a homerun to me...  If I understand you correctly, you’re buying $120,000 of NOI for $250,000.

 

Self storage facilities are valued on Cap Rates and Price per Sq.Ft.  If the facility is in a location that is at least decent, then it would trade for under a 10% cap rate.  So, that additional $120,000 of income adds $1.2MM of value to the property.

 

Yep. Though I'd be curious what the capex needs have been historically and will be going forward. Has the owner delayed any necessary capex spend in recent years? Because that'd be a hit to near term profitability and change the equation of value here.

[Williams406]

Look over the books carefully. I've never bought a private business, but have heard some stories about accounting issues. Occupancy # is interesting. Most of the larger players are running closer to 90%. Could be a local market issue, a pricing issue, or an opportunity if you can figure out how to boost that without cutting lease prices.

 

If you don't wish to manage the business, Global Self Storage does have a third-party management business:

 

https://www.globalselfstorage.us/third-party-management

 

If you're comfortable posting some updates on this, I'd be interested to hear more down the road.

[arcube]

Guys, looking for some insight here. My family and I own a 38k+ sq ft warehouse in the Northeast. That said, the environment has given us the opportunity to buy out our current tenant. This tenant operates a self-storage facility that's been rather successful for the last 20+ years. There are ~400 units, 70/30 split between 10x10's and 5x5's, pricing is from $65-$200 a unit/month, and current occupancy rests at 76%. These figures lead to roughly $120k in NI. While still in preliminary discussions, he's looking for about $250k for the business.

 

My questions are: What's the PMV of such a deal (excluding land value, strictly the business)? How are storage facilities usually priced (based on NOI, FFO, FCF etc.)? And do the economics of this deal look appealing? Please add any experiences/advice. Thanks!

 

There have been some good comments so far, I will pitch in. Given that we don't know a lot about your real estate/location and lease term, take the below accordingly.

 

What are your options - if the tenant operates till the end of lease and finds a buyer - are you happy to stay as a landlord? If a buyer is not found, and there is no storage operator willing to take on the lease, what do you have to do to the real estate to market it generally as a commercial space of something similar? How long can you keep the storage empty? Who bears that cost. Storage properties are specific and a lot will be needed to make it general use. That to me is a red flag in terms of economics. 38K sq ft is quite large.

 

If your real estate is financed cheaply or you own it outright, that will change the economics here. Assuming you own this place and it is paid off, it makes a lot of sense to negotiate with the seller/tenant and get a reasonable deal. 2x NI on the business is a real good deal. That would be a very low EBITDA multiple as well depending on how the operating business is financed. I am assuming the Seller/Tenant has provided the NI numbers with labor/people cost included because sometimes the owner will just not take any salary and depending on the legal structure take the earnings. That math will be important.

 

Lastly, on a qualitative note, I love storage businesses. Americans buy shit and then store it and are willing to pay every month and forget about it (true SaaS). In these type of businesses, operating expenses are very low and low amount of labor is used. That is golden in my book not to have a ton of employees like a restaurant/other people intensive business. More people, more issues. In these businesses, few people are needed at the location and just be there as a warm body to look at the cameras and play Solitaire. : )

 

I hope this helps. Keep us posted on what you do. Good luck.

[Gregmal]

I would look at the occupancy rate, sure. But more specifically, what they are doing to get there? A while ago, SELF CEO was telling me a story about one of their acquired properties and how they instantaneously raised occupancy more than 10%. Prior to the deal, they asked the owner if he advertised. The guy defeatedly said, "yea", and pulled a Yellow Pages book out showing their ads. They acquired the property and bought some ads on Google and in months had results.

[StubbleJumper]

Guys, looking for some insight here. My family and I own a 38k+ sq ft warehouse in the Northeast. That said, the environment has given us the opportunity to buy out our current tenant. This tenant operates a self-storage facility that's been rather successful for the last 20+ years. There are ~400 units, 70/30 split between 10x10's and 5x5's, pricing is from $65-$200 a unit/month, and current occupancy rests at 76%. These figures lead to roughly $120k in NI. While still in preliminary discussions, he's looking for about $250k for the business.

 

My questions are: What's the PMV of such a deal (excluding land value, strictly the business)? How are storage facilities usually priced (based on NOI, FFO, FCF etc.)? And do the economics of this deal look appealing? Please add any experiences/advice. Thanks!

 

 

You made no mention of labour.  Is the $120k a "true profit" meaning that all labour has been costed, or is that the result of an unpaid family member sitting at the front desk for 84 hours per week?  If the business uses only hired labour, then $250k for $120k NOI sounds pretty good.  But, if there is a large mass of uncosted labour in that, you would basically be buying yourself a job.

 

 

SJ

[Cigarbutt]

Perhaps you’ve got a distressed seller but, otherwise, it sounds too good to be true.

-The expense line items have to be investigated and possibly normalized.

-It seems like this is a scenario where the manager’s ‘salary’ has to be deducted from the NI number. The industry often uses a 5% of gross income number to estimate that cost if it’s not included already and you have to assess if 5% is the real number in this specific case.

-How many years left with the lease?

-Is it possible the operator is looking to be hired as a competitor’s manager (with the obvious risk of lower occupancy in your leased space)?

-Do you have a firm grip of local competitive dynamics (known and potential)?

-Is the low occupancy due to lack of awareness or excess capacity?

 

 

[Morgan]

We don’t have all the details about everything but - - - - $250,000 for 400 units is WILDLY, WILDLY cheap. That’s $625 per unit. Way, way below cost to build. The least expensive per unit cost I’ve seen in my local deals (between Columbus OH and Pittsburgh PA) is $2700 unit. Many are in $4000-$5000 range and going up to $9000 per unit (crazy high).

 

If you don’t buy this, let me know where it is and I’ll buy it.

[bizaro86]

It looks like a homerun to me...  If I understand you correctly, you’re buying $120,000 of NOI for $250,000.

 

Self storage facilities are valued on Cap Rates and Price per Sq.Ft.  If the facility is in a location that is at least decent, then it would trade for under a 10% cap rate.  So, that additional $120,000 of income adds $1.2MM of value to the property.

 

Is it your opinion that leased self storage would trade at a 10% cap rate?

 

Because leased industrial real estate trades way below that (say 4-5% caps). So valuing the whole thing as a self storage operation at a 9% cap means you are taking a big gain on the operations but a loss on the building portion.

 

The terms of the existing lease are really important here, imo

[SharperDingaan]

You're looking at pre Covid-19 earnings. Do you really think that revenue, 0-18 months following Covid-19 is going to look remotely close? They know this business, and this location. So why are they selling? and supposedly at such a good price? Maybe because they just don't see continuation as being worth it, within the remaining term of the lease?

 

You own the building, you know how many tenants are asking for deferrals, how much and for how long. You talk to others as well. When cash is short, people stop paying, and abandon their lockers. The revenue is from liquidating assets, not rentals - is that in the plan? are you OK with a liquidation business in your building?

 

Or - maybe it's better to just buy a portion of the business? in return for giving them a rental term extension at a discounted rate. At the end of the term renew for an extended period, at market rate, and help them sell the business. They'll ultimately net more for the business, and you avoid a potential nightmare.

 

SD

 

 

 

[Morgan]

I’ll just add this for general info. I’ve seen self storage properties selling at 7% to 25% cap rates. Lower rates more recently as the market has heated up (until covid 19).

 

I never bought any because they’ve not been attractive enough for me, but I may have some some errors of omissions.

[gfp]

Morgan are these numbers ($4k-5k per unit) and the caps rates you are mentioning for self storage properties that include the real estate?  This one does not.  As mentioned above, when push comes to shove the landlord probably already owns this business and its improvements - at the end of the lease term.  Without seeing the books and the length of the lease, it really sounds like someone trying to sell his job because he knows his income is about to be halved by non-payment / deferred payment / etc by the ultimate tenants.

 

We don’t have all the details about everything but - - - - $250,000 for 400 units is WILDLY, WILDLY cheap. That’s $625 per unit. Way, way below cost to build. The least expensive per unit cost I’ve seen in my local deals (between Columbus OH and Pittsburgh PA) is $2700 unit. Many are in $4000-$5000 range and going up to $9000 per unit (crazy high).

 

If you don’t buy this, let me know where it is and I’ll buy it.

[SharperDingaan]

Some basic numbers ...

A medium (garage size) 10x10x8' unit goes for $310/month. 1st month free, rent already cut $10/month, 13 available. A medium (garage size) 9x10x8' unit goes for $243/month. 1st month free, rent already cut $10/month, 1 available. A small 4x10x8' unit goes for $150/month. 1st month free, rent already cut $20/month, 1 available. ie: Units are very price sensitive, and the smaller the space - the MORE price sensitive. That small unit would be used by a (small unit) condo dweller, many of whom have just lost their job to Covid-19. ie: High odds that within the next 2-6 months, there will be a wave of rental defaults, and few replacement renters.

https://www.xyzstorage.com/locations/toronto-west/book-a-unit/#medium

 

Assume the 9x10x8 rents for an average 10 months, net of a second $10/month cut. Rent of $2,097, or ([10-1]x233)

Before the $20/month discount, and the 1-month free rent, total rent was $2,530, or (10x253)

Work like a pig, for a 17% pay-cut.

 

Assume the 4x10x8 rents for an average 8 months, net of a second $20/month cut. Rent of $910, or ([8-1]x130)

Before the $40/month discount, and the 1-month free rent, total rent was $1,360, or (8x170)

Work like a pig, for a 33% pay-cut.

 

As costs could not be cut by anything close to this, NI must be dropping like a brick.

At a 50/50 mix of units, the revenue cut is 25%.

 

If you don't work with this tennant you're stuck with the costs of upkeep, on a lot of empty space, for an extended period.

But work together, and maybe those potential losses that BOTH of you have, can be turned into an opportunity?

 

SD

 

 

 

[Morgan]

Morgan are these numbers ($4k-5k per unit) and the caps rates you are mentioning for self storage properties that include the real estate?  This one does not.  As mentioned above, when push comes to shove the landlord probably already owns this business and its improvements - at the end of the lease term.  Without seeing the books and the length of the lease, it really sounds like someone trying to sell his job because he knows his income is about to be halved by non-payment / deferred payment / etc by the ultimate tenants.

 

We don’t have all the details about everything but - - - - $250,000 for 400 units is WILDLY, WILDLY cheap. That’s $625 per unit. Way, way below cost to build. The least expensive per unit cost I’ve seen in my local deals (between Columbus OH and Pittsburgh PA) is $2700 unit. Many are in $4000-$5000 range and going up to $9000 per unit (crazy high).

 

If you don’t buy this, let me know where it is and I’ll buy it.

 

The ones I’m referring to do include the property. Mostly they are mom and pop type establishments and the sellers are retiring. Typically 40-200 unit type places. Generally not big enough for publicly traded companies to care about. Around here, they are a building on the road, sometimes a few buildings, occasionally fenced in. There are almost no climate controlled units here. I suppose the market can’t support it.

 

That being said, in this case the self storage owner does seem to be at the mercy of the landlord. If he’s had the building for 20 years, its likely paid off so he can hold out if necessary. I guess we’d really need to see the books to know the whole situation.

[nspo]

I greatly appreciate all the advice! I know I left out some key information but will keep adding it to the thread as I receive it. (including financial snapshots)

 

- Occupancy stands at 76%. Seems like the industry pre-covid was somewhere between 85-90%

- The owner is in his 80's and has mentioned that he "lives within 4 miles and goes to collect cash once a month". That should tell you his involvement as an owner/operator, ha.

- He spends under $100 (in dollars, not thousands) ANNUALLY on total advertising expense and has mentioned to me that "advertising doesn't help, we've been here 20+ years so everyone knows us. This to me seems is the stereotypical "on his way out" mentality.

- There's been an increase in competition within 3 miles of the facility. A REIT has been built up with an unknown amount of supply (doing more research). His argument to the competition was: "customers go there and then come to us since we're so close. We then beat them on the price every time. This is because his nut is much smaller than the $10m-$15m to build a new, indoor facility.

- After looking through industry standards it seems like the average profit margins are in the 11% range. That said, on roughly $540k of NI in FY18' it seems his margins are inflated for some reason. Obviously 11% is an "average" and it can vary but the discrepancy seems rather large. Could point to the fact that my family is undercharging on rent.

- The reason that the margin has gone up from roughly 14% to 25%, based on my research is that my family has given him a break on the rent to the tune of 50k. (knee jerk reaction, I know!). The true economics of the business hasn't changed much.

 

- There's room for another 120 units to be added to the facility, indoors.

- There are 2-3 workers with a total annual salary of about $70k (management software addition could lower this).

- I don't believe he's providing any insurance on personal goods held in units. This could be another $15k-$30k value add, based on $10-$25 a month for values up to $2.5k

- He has no retail operation for locks, tape, boxes, etc. (~$5k)

- He doesn't provide truck rental ($5k-15k)

 

Therefore, if I'm not mistaken it seems that a conservative value-add to the existing operation is in the ballpark of $50k. With the addition of dynamic pricing software, this number could go up an additional 10-15%.

 

 

 

[Cigarbutt]

Interesting!

The topic is a nice change from all the financial re-engineering and please-bail-may-out-Jay stuff that is going on now.

 

The deal sounds good. A way to see it is that you could increase the rent that you pay to yourself and, assuming the lease term has a minimum of 5 years left, to obtain a breakeven result from on an undiscounted payback perspective and to get the extra cash flows in the interim as well as the 'goodwill' associated with the business. You could also try to improve the economics of the business, as you describe.

 

There would be one area of concern. Maybe the present operator is simply looking for an exit but the self-storage business has a local feel to it. There is another octogenarian who has smell for things and who, last year, sold his position in an alternative CDN mortgage market player and who, just recently, sold his newspaper position.

 

A tougher economic environment would be a potential relative positive as excess capacity would be dampened and people's need to store items may paradoxically rise for some time.

 

[Spekulatius]

Go get it, imo.